Tax procedures can be extremely challenging to understand if you are a freelancer or an independent contractor. From chasing clients for payments to filing taxes, you're the one held responsible for making sure your taxes are filed correctly and on-time.
The number of self-employed people in the US currently stands to be more than 10 million. Work flexibility is a coveted benefit, but failure to understand taxes can be a huge problem.
Maybe you're already keeping track of your expenses on a spreadsheet, such as Excel. What if you learned that there are some permanent deductions that may help you reduce your taxes? How would you feel about paying $8,000 in taxes instead of $10,000?
Here's one example: If you are doing business in a country other than your country of citizenship, you may have to apply for Tax Residency status within that country. For instance, if you are a non-citizen operating in Dubai, a UAE Tax Residency Certificate helps you benefit from the Avoidance of Double Taxation Agreement.
Let's learn more in this guide on the tax benefits and deductions that self-employed people can claim, regardless of whether the business is making a profit or loss.
1. The Home Office Deduction
Whether you rent or own the space, the location you operate from can be considered an expense. It should be your principal place of business, and the space must be purely used for your business activities. There are two ways to calculate this type of deduction:
- The simplified option: You can multiply the workspace’s total feet by $5. For instance, the official total feet area is 200 sq. ft. Then, you will be entitled to a $1000 deduction.
- The regular method: In this method, you may consider the percentage of space utilized for office work. For instance, if your office occupies 20% of your home, then 20% will be deducted from the overall bills. It may take electricity bills, water bills, and other bills.
You can also add other home-related expenses to the deduction, such as a mortgage, rent, taxes, insurance, and other utility bills. It can be complex to calculate the home office deduction. Studies reveal that most self-employed individuals in the United States operate from their homes. If you are confused about the calculations, reach out to a tax consultancy expert for assistance. The experts may help you understand the deductible tax write-offs.
2. Internet Connectivity and Phone Bills
If you only have a phone line, you will not be able to deduct it from the bills. You are only permitted to deduct for things that are specifically used for the business. You can deduct the expenses related to fax, phone, and the internet that pertain to your business. It would be ideal to have a separate phone line for personal and business. Otherwise, you may have to prove and justify the percentage that was being used for the business.
3. Health Insurance Premiums
Insurance companies such as Prudential offer multiple plans to self-employed in the US. Most entrepreneurs see health insurance as an additional expense. However, if you are self-employed, you may add health insurance to the list of deductibles. You can deduct the amount paid for yourself, your spouse, dependents, and children under 27. Report the net profit in the form to use this deduction.
4. Training and Education Expenses
HR Magazine reports that more than 80% of millennials in the US firmly believe that learning can help advance their career. Taking courses and participating in educational programs can help enhance your skill sets. If there is any course that is ideal for the current line of work, it will be deductible. However, it will be nondeductible if the aim of the course is to qualify you for a new role. Keep these things in mind while deciding and calculating the education expenses. If the expense is eligible for tax write-offs, you may also be able to deduct other aspects related to your education. It may include expenses related to books, fees, transportation costs, and other supplies.
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5. Meals Deduction
Another expense that could be tax-deductible would be the expenses related to your meals. Keep in mind that it will only be deductible if it is related to a client meeting or the amount spent on meals for a business conference. The meal should not be extravagant. Besides this, you will have to maintain a record of all the meal receipts. 50% amount of the standard meal expenses will be deductible.
6. Travel Deduction and Business Mileage
If you use a car for work, you may add it to tax write-offs. Keep a respective record of the mileage crossed for both personal and professional purposes. For instance, you can deduct if you are using it to attend meetings, travel distance for work, or make deliveries. You will be eligible for this deduction only if you are not already claiming the depreciation on the vehicle.
Besides this, the expenses related to business trips are also deductible. You can deduct the cost of transportation, meals, lodging, and the expenses spent at the destination. Meals are only 50% deductible. The expenses of the guests accompanying you on the trip will not be considered tax write-offs. You should not choose extravagant or luxury hotels as they will not be deductible. Choose a reasonable stay and deduct the necessary amount from the taxes. If you have any doubts, you should always consider consulting an expert for guidance.
7. Publications and Subscription Deduction
Subscription fees for software or platforms that you use to run your business are deductible. Additionally, your government may offer various resources to help you develop your skills. For example, as an entrepreneur or a freelancer, you may consider having subscriptions to different magazines, journals, and books. If they are being used for your business, they may be deductible. Keep in mind that a daily newspaper is not considered a business expense. Subscriptions to Forbes, ResearchGate, or other websites may be considered deductible.
8. Business-related Supplies
From stationery to grocery items, all the supplies that are used for the business will be deductible. Paper, pens, desktops and laptops, and the amount spent on decorating the workspace may come under this type of deduction. If you have a home office, consider keeping the home and office supplies separate. Besides this, you should maintain a record of all the supplies to claim them. Maintain a file and add all the receipts to the same. Missing records can lead to the denial of claims.
9. Credit Cards and Loans
More than 9 million Americans are self-employed. Of that number, many choose to access financing for their business using credit facilities. You should note that you may be entitled to deduct the amount and interest spent on credit cards and loans. We would suggest you use a separate credit card for personal use and business use. It may get difficult to show the records when you are using the same credit card. If the entire loan amount was not used for business, you would have to show the records of the percentage that was utilized for the business.
10. Startup and Advertising Expense Deduction
Every startup requires some form of funding and investment. You can be worry-free as the amount is deductible. It may include costs related to market research, accountant fees, attorney fees, and transportation costs spent on hunting the right business location. Buying equipment for the business may not be deductible as these costs are depreciated. Other than this, you will be spending a certain percentage on advertising and promotion of your business.
Whether it is a billboard advertisement, a Google ad, or a Facebook ad, anything that is related to your business is deductible. Make sure that you use your money wisely and spend it on the right form of advertising. Take some time to understand different forms of advertising and choose the right one that meets your business objectives.
11. Club and Membership Fees
Club and membership fees will be deductible only if the amount is being paid to certain organizations. The following types of organizations have programs that may benefit self-employed people:
- Boards of trade
- Real estate boards
- Trade associations
- Civic or public service organization
- Business leagues
- Chambers of commerce
- Professional organizations such as bar associations or medical associations
The expenses will not be deductible if the clubs and membership groups are made for recreation, social connection, or pleasure purposes.
12. Rent Deduction
If you rent office space, it can be deducted. You will not be able to consider it as a tax write-off if you are the owner of the property. Keep this in mind so that you calculate the deductions properly.
13. Retirement Plan Contribution
Make contributions to a qualified plan. It will be beneficial for the future and will help you in the later stages of life. The amount that you contribute to the retirement plan will be deductible. Consider contacting a local tax professional expert to understand the plans that may be worth it. You may choose from a 401(k) plan, SEP IRA, or any other authorized plan, depending on your requirements and your country of residence.
Knowing the expenses that are deductible from your income will greatly help you reduce the burden of self-employment taxes.
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